Sacred Heart Hospital enlists turnaround company

With its CEO the target of a federal fraud investigation, Sacred Heart Hospital has enlisted the help of a prominent turnaround firm to run operations, raising the possibility the distressed facility soon could be put up for sale.

Alvarez & Marsal Holdings LLP took over at the West Side for-profit hospital after the FBI arrested owner and CEO Edward Novak, Chief Financial Officer Roy Payawal and four physicians on Sacred Heart's medical staff in connection with an alleged illegal kickback scheme.

According to a federal affidavit filed in April, Mr. Novak orchestrated the scheme, which paid doctors fees in exchange for referrals of Medicare patients in an effort to boost payments from the federal program for the elderly and disabled.

Mr. Novak has been free on a $10 million bond since his arrest, but one of the conditions of his release was that he have no contact with potential witnesses who may be called to testify against him, including workers at the hospital. Running the hospital in his stead has been Karen Davis, who is identified on Alvarez & Marsal's website as an Atlanta-based senior director at the company.

Reached by phone at Sacred Heart, Ms. Davis confirmed she was with the New York-based turnaround firm and that she was acting as interim CEO, but she declined to comment on whether she was exploring a sale of the facility.

“We're providing management assistance,” she said.

Still, experts said, Mr. Novak may have no choice but to sell. The federal investigation likely has had a chilling effect on admissions by physicians, no doubt putting the hospital in a precarious financial state. The only way to return the hospital to sustainability is a change in management and ownership.

“To have any hope of survival, the management team needs to be separated from the hospital,” said Kenneth Malek, president of MalekRemian LLC, a Libertyville-based turnaround and investigation firm. “There's relatively little a turnaround firm can do in that situation other than be a caretaker for a buyer that shows interest.”

'SELL-SIDE' SERVICES

Among other offerings, according to the firm's website, Alvarez & Marsal's health care practice provides “sell-side advisory” and “exit and support” services.

“Whether selling a complete portfolio company, carving out a division or business unit, or preparing for an IPO, A&M can provide the necessary support to ensure a smooth transition, while still keeping a close eye on maximizing business performance,” the website says.

It's possible the company might not have been hired to prepare Sacred Heart for sale, experts said. It could have been hired simply because the hospital needs managers to man the controls temporarily while its CEO is out of pocket. Or it could be there to straighten out the hospital's books and determine a truer picture of its financial and operational picture.

An Alvarez & Marsal spokeswoman at the firm's New York headquarters did not return a call to comment.

Mr. Novak, through a company he heads called Westside Community Hospital Inc., has owned Sacred Heart since 1988. Before the acquisition, the hospital was a nonprofit struggling to stay open amid slow payments from the state's Medicaid program.

After he purchased it, Mr. Novak changed the name to Sacred Heart from Franklin Boulevard Community Hospital, though it had no affiliation with any religious organization. He also reconfigured it as a for-profit enterprise.

The hospital apparently is profitable. According to the federal affidavit detailing the kickback allegations, Mr. Payawal was recorded telling a cooperating witness that Sacred Heart was projected to earn $8 million this year, not accounting for a “$2 to $3 million cushion.” Mr. Novak also appears to have benefited financially from running the hospital. At a bond hearing in April, the Park Ridge resident disclosed assets totaling about $26 million.